Frozen Russian assets add to war woes for UK pension funds

UK pension fund managers write off billions of pounds of frozen Russian assets held for their members as they run out of options to sell them safely, adding to risks to their invasion funding positions of Ukraine by Russia.

The funds have in many cases written down the value of these assets, after last month’s invasion – which Russia calls a “special military operation” – led to rounds of sanctions by Western governments and countermeasures by Russia.

There are approximately two trillion pounds ($2.64 trillion) of assets in defined benefit pension or final salary funds, which provide guaranteed retirement income to millions of workers, including including garbage collectors, supermarket staff and bank tellers.

Pension trade bodies and major pension funds contacted by Reuters said investments in Russia were likely to account for up to 0.5% of Britain’s pension assets, or £10bn.

Many pension funds are in deficit after years of extremely low interest rates that have dampened their investment gains. But their funding levels have improved during the COVID-19 pandemic as economic stimulus in response to the virus has pushed up asset prices.

Now the invasion is causing shocks.

“As soon as the conflict happened, in fact, most investment managers wrote that investment (in Russia) was at zero,” David Fairs, executive director of regulatory policy at Reuters, told Reuters. The Pensions Regulator (TPR).

“The biggest impact is what happens to inflation, to markets, what happens to energy prices, what happens to supply chains,” he said. he adds.

Besides the hit to pension fund investments, the economic repercussions of the war could affect the financial strength of companies that support pension schemes, he said.

A poll of 2,000 British adults by campaign group Make My Money Matter this month found that 86% of people want their pensions to move out of Russia.

But with tit-for-tat restrictions rumbling the trading and payment systems, it’s not easy to sell.

“You can make the decision in principle (to sell), but in fact you probably can’t negotiate right now,” Fairs said.

Even if you can find a buyer, rigorous due diligence is needed to verify who you are selling to.

“If it’s a bargain price, it’s probably an oligarch trying to buy it,” a source at a major pension fund said.

“It could be as bad to sell it for 1 penny to an oligarch as to keep it for now.”

Asset managers are also struggling to leave Russia, many of whom manage money on behalf of company and local government pension schemes.

Many funds with high exposure to Russia were frozen shortly after the invasion, after Russia suspended its stock market.

Last week, Luxembourg’s main financial center said two-thirds of those funds were frozen.

The situation could get a little easier after April 1, when non-residents will again be able to sell shares on the Moscow Stock Exchange, although the capital controls that Moscow has introduced in retaliation for Western sanctions mean that it will be difficult to repatriate profits.

“DO NOT BUY” POLICIES

In addition to defined benefit schemes, £500 billion is invested in defined contribution schemes, where members build up a pool to spend on their retirement.

The Association of Pensions and Life Savings reports that around a third of all pension schemes have less than 0.1% of their assets in Russia, although overall the figure is “less than 0.5%” among the funds the trade body has checked with, according to PLSA director of policy and advocacy Nigel People.

Major pension funds such as West Yorkshire Local Authority, Railways Pension Scheme, BBC and NatWest have 0.1% or less of their investments in Russia.

Some funds have set out public positions on how they will treat Russian investments, such as the HSBC Bank Pension Trust, which said Russian-domiciled assets accounted for 0.01% of assets.

The regime has said it will no longer buy any and will seek to divest existing ones if necessary.

UK Finance Minister Rishi Sunak has called on owners of assets such as pension funds to cut Russian investment.

Richard Farr, chief executive of pensions consultancy Cardano Advisory, said clients were also considering restricting indirect investments in Russia, with some considering “do not buy” policies for companies with operations in Russia.

TPR has, however, warned in recent guidance that pension funds have a fiduciary duty to their members – to do the best they can for them financially.

If pension funds sell their Russian assets as fast as they can, it will likely be for little or nothing. But if they hold onto them in the hope that the assets will appreciate in value as the dispute is resolved, they may violate their own ethical guidelines.

“It’s a tough decision,” Farr said.

($1 = 0.7590 pounds)

(Editing by Toby Chopra)